(First draft, August 2001)

The distributional effects of growth : micro vs. macro approaches 1

Franois Bourguignon
Delta and World Bank, Paris

With the turn of the century, distributional issues in the development field seem to have
gained an importance they may never had before, even in the 1970s when so much
attention focused on the so-called Kuznets curve. Distribution is not only 'back from the
cold', as Atkinson noted a few years ago.2 In the new century, it has clearly become a
'hot' issue. Raul Prebisch would certainly not have been against this state of affair, as
equity, both between and within nations, always ranked very high in the list of his
concerns about development.
The recent resurgence of interest for distribution came with a considerable broadening of
the questions being debated. The increasing awareness towards the end of the 1960s that
growth was not necessarily distribution neutral3 explained the emphasis that was then put
on understanding the effects of economic growth on distribution. The world
macroeconomic disruption that followed the oil crisis of the mid-70s practically dwarfed
distribution issues for the next 15 years, as research priority in development shifted from
growth and equalizing the gains from growth to achieving macro-economic stabilization
and 'structurally adjusting' inefficient economies. When growth and distribution issues
came back to the forefront during the 1990s, more importance was given than before to
the effects that the initial distribution of resources may have on economic growth. In
particular, the question of whether disparities in inequality could explain the observed
1

Paper prepared for the Raul Prebisch seminar, "La teoria del desarollo en los albores del siglo XXI"
ECLAC, Santiago de Chile, August 2001. Sections 1 and 2 borrow partly from a recent paper by
Bourguignon, Ferreira and Lustig (2001) presented at the Latin American Meeting of the Econometric
Society, Buenos Aires, July 2001. The opinions expressed here are the author's and do not necessarily
reflect those of the World Bank, its Executive Directors or the countries they represent.
2
Atkinson (1997).
3
Of course, that economic development could not be defined as the increase of GDP per capita and
therefore involved a distributional dimension had been pointed out by several early thinkers on
development like Prebisch see in particular Prebisch (1963) Singer or Perroux.

2
heterogeneity in growth performances, and especially the fact that many countries failed
to grow significantly faster despite the structural adjustments that had been achieved,
attracted very much interest. More fundamentally, the objective of halving world poverty
that international development agencies and the leaders of the richest countries have set
for the first 15 years of the new century, clearly calls today for a fuller understanding of
the multi-causal relationship between growth, inequality and redistribution. Indeed,
achieving this crucial goal requires either to accelerate growth in developing countries,
provided the way this is done does not benefit only the rich by increasing inequality, or to
redistribute, provided that the instruments being used to do so effectively do not slow
down growth at the same time.
Results obtained by economic research on these various fronts during the last decades are
mixed. On the theoretical side many channels through which economic growth and the
distribution of income and/or economic resources may interact have been explored.
Progresses in the understanding of that interaction have been considerable, a
disproportionate part of them having taken place in the last 10 years or so.4
Unfortunately, the situation looks less favorable from an empirical point of view. Theory
is often inconclusive in the sense that it identifies alternative channels through which
growth and inequality may interact in opposite ways, thus leading to opposite policy
recommendations i.e. redistribute more in one case, redistribute less in the other.
Eliminating that ambiguity must ultimately rely on empirical analysis. But empirical
results have so far been disappointing. On the one hand, cross-country aggregate analysis
could not detect any strong relationship between growth, inequality and policy
instruments likely to affect one or the other. On the other hand, empirical microeconomics did not contribute much evidence. In effect, it was not seen until now as an
adequate tool for analyzing a relationship that involves a macro-economic concept like
growth.
The preceding statement on the inconclusiveness of cross-section empirical studies of the
relationship between growth and inequality might be found too strong. After all, finding
no statistical significant relationship between some variables may itself be an important
result. In the field of growth and inequality, this may mean that the rate of growth of an
economy has no impact on the distribution per se, in which case 'growth is good for the
poor' as recently concluded by Dollar and Kraay (2000). In a different perspective, it
might also be interpreted as implying that redistribution has no effect on growth. Both
interpretations of the absence of a significant relationship between growth and inequality
hide two fundamental weaknesses, however. First, cross-country comparisons may reveal
relationships, or the absence of a relationship, that are valid only 'on average' across
countries, but may not be valid for particular sets of countries.5 Second, it is often
difficult to control for the effect of omitted variables and misspecification, which, as will
be seen below is likely to be quite strong in several instances.
4

For a review of this literature see the introduction and various chapters in Atkinson and Bourguignon
(2000).
5
This argument is still valid when 'panel' data are used, that is when several observations of the same
country at different time periods are available, if there is too much time persistence of shocks in the
relationship being studied.

If this skepticism about the possibilities of macro-econometric analysis is justified, then

what should be done? The main point made in this paper is that efforts must bear more on
the micro-economic side. A good reason for focusing on aggregate data in the past was
that more detailed data, which would have permitted more powerful hypothesis testing,
were not available, or not available on a regular and fully comparable basis. Today, this
situation is radically changing. Reliable household surveys are available in numerous
developing countries on an annual basis. They permit following the evolution of the
distribution of income, or of other welfare concepts, over time with considerable detail.
In Latin America, for instance, there are at least 10 countries where this kind of
information has been available annually for more than 20 years. Analyses of the
relationship between the process of economic growth and distribution relying on the
structure of growth, rather than the overall growth rate, and on the full distribution of
household or individual welfare, rather than the Gini coefficient, should thus be possible
within an increasing number of countries The challenge of the years to come seems
precisely to design methods that will permit to exploit the opportunities linked to the
increasing availability of detailed household and individual data as well as the exploding
computing facilities offered by modern technology.
This presentation draws some lessons from recent work made in that direction. It relies
very much on the results obtained in the MIDD (Microeconomics of Income Distribution
Dynamics) project undertaken under the auspices of the World Bank and the
Interamerican Development Bank 6 and, to a lesser extent, on recent extensions of the
methodology in that project towards applied general equilibrium modeling Ganuza et
al. (2001), Robillard, Bourguignon, Robinson (2001). The ambition of the MIDD project
was to explain the evolution of the distribution of income both at the household and the
individual earner level - as a function of several basic parameters in a few Asian and
Latin American countries. This project is now near completion and several extensions are
in progress. This seemed to be a good opportunity to reflect on what was learned in terms
of methodology for the analysis of the relationship between growth and distribution and
the directions that should be followed in the future.
The paper is organized as follows. Sections 1 and 2 present succinctly the methodology
of the MIDD project and the main results obtained in the case of four countries : Brazil
and Mexico on the Latin American side, and Indonesia and Taiwan on the Asian side.
Then, section 3 discusses what the implications of these results may be for the
relationship between growth and distribution in general, and for cross-country macro
analyses of that relationship in particular. Section 4 presents some extensions under way
that should permit to go deeper into the analysis by bringing elements of macro modeling
in the original methodology. Section 5 summarizes and concludes.
1. Micro-simulation analysis of changes in household income distribution
Standard methods for analyzing changes in the distribution of income or consumption
expenditures among individuals or households are based on the decomposition of
6

See Bourguignon, Ferreira, Lustig (2001).

4
changes in some poverty and inequality measures by population subgroups. With this
approach, the change in some scalar measure of inequality or poverty is decomposed into
what is due to changes in the relative mean income of various predetermined groups of
individuals or households, what is due to changes in their population weights and,
residually, what is due to changes in the inequality within those groups. When groups are
defined by some attribute of the individuals or households, such as location, age or
schooling, this method identifies the contribution of changes in the distribution of these
characteristics and economic returns associated to them to changes in summary poverty
or inequality measures.7
There are two main limitations to this approach. First, the analysis relies on summary
measures of inequality and poverty rather than the full distribution. Second, the
decomposition of changes in inequality or poverty measures often leaves an unexplained
residual of a nontrivial magnitude.
An analogous decomposition methodology, inspired by Shorrocks (1982), is based on
single-equation regressions on income run at various points in time. Income or earnings
are expressed as the sum of various characteristics - age, schooling, etc. - weighed by
regression coefficients. Income inequality may then be expressed as the sum of the
inequality of these characteristics in the population weighted by the regression
coefficients, which are conveniently interpreted as economic returns on these
characteristics. Changes in total inequality may then be expressed as a combination of
changes in those returns and changes in the distribution of characteristics within the
population. However, the same kind of problem arises with this approach as with the
group-decomposition analysis. 8
Another way of using the income or earning regression to analyze distributional changes
relies on micro-simulation techniques. Based on the regression and the micro data behind
it, it is a simple matter to simulate what would be the distribution of individual earnings
or household incomes if one ore several coefficients of the equation were modified, or if
the joint distribution of the explanatory variables within the population would be
different. Juhn, Murphy and Pierce (1993) use a technique of this type to study the
determinants of the increase of wage inequality in the US during the 1970s and the
1980s.9 In particular, they are able to identify how much of this change is explained by an
increase in the rate of return to schooling, a fall in the gender wage differential and a
change in the rate of return or the distribution of unobserved talents. A side benefit of this

The decomposition of changes in the mean log deviation of earnings in UK by Mokherjee and Shorrocks
(1982) is the best illustration of this method. The comparison over time of poverty profiles (Huppi and
Ravallion (1996)) or of poverty probit analysis (Psacharopoulos et. al., 1993) belong to the same tradition.
A related approach decomposes changes in scalar poverty measures into a component due to growth in the
mean and one due to redistribution (Datt and Ravallion, 1992)
8
See Fields and Leary (1997). This problem is discussed in some detail in Bourguignon, Ferreira and
Lustig (2001).
9
An application of that method to household income in Mexico is provided by Bouillon, Legovini and
Lustig (1999).

5
method is also that it permits handling the whole distribution of earnings rather than
specific summary measures of inequality or poverty. 10
The preceding method may be generalized to household income distribution by
broadening the income model. A household income generation model is estimated that
comprises a system of equations rather than a single equation describing individual
earning determinants. This system involves earning equations for all household members
at working age, potential household self-employment income equations and occupational
choice models describing how individuals at working age allocate their time between
wage work, self-employment and non-market time. This multiplicity of equations, the
non-linearity implied by modeling both potential earning or self-employment income and
occupational choices, as well as the obvious simultaneity of the occupational decisions of
the various members of a household make the analysis of changes in the distribution
more complex than the single-equation exercises described above.
Micro-simulation methods proved to be extremely powerful instruments for identifying
the sources of changes in the distribution of incomes, or individual earnings, in a given
country. In the MIDD project and several other studies based on the same
methodology,11 the observed change in distribution between two given years, say year 1
and 2, were decomposed as follows.
- 'price' effects show how the distribution would change if the coefficients of the earning
equations in year 1, assimilated to the 'price' of or return to individual characteristics
present in the equation, were replaced by the coefficients of the earnings equations of
year 2, or vice-versa. By rescaling all earnings so that means are kept unchanged, this
type of micro-simulation actually shows the effect on the whole distribution of changing
the 'structure' of earnings as defined by the usual socio-demographic characteristics of
earners : gender, age, schooling, area of residence, The simulation also covers selfemployment income functions, which comprise additional income determinants (number
of household members involved in household business, land and other assets available,
). The simulation can bear on all coefficients at the same time, or only on some aspects
of the structure of earnings, like schooling, gender differentials or returns to land. Note
also that the analysis is 'partial' in the sense that it is made for given occupational choices
by all individuals in the household. Changing the structure of earnings may have some
effect on individual labor supply or occupation decisions, however.
- 'occupational choice' effects are obtained by applying to year 1 the coefficients of the
models that describe the labor supply and occupation decisions of household members in
year 2, and vice versa. All individual characteristics remain constant. Earnings remain the
same for individuals whose occupational status is not modified, but do change in the
opposite case. In particular, individuals who are simulated to take a job must be given
earnings that correspond to their characteristics. The original earning or self-

10

A non-parametric version of that method is provided by diNardo, Fortin and Lemieux (1996).
See in particular Altimir, Beccaria and Gonzalez Rosada (1999), Gasparini, Marchionni and Sosa
Escudero (2000), Grimm (2001).

11

6
employment income - regression is used to draw randomly these potential earnings.12
Note that, again, the analysis is partial but, this time, in a double sense. On the one hand,
the general equilibrium effect on earnings of changes in occupational choices are ignored.
On the other hand, the occupational choice models are 'reduced form' models where
earning rate do not appear explicitly. It follows that coefficient changes observed
between years 1 and 2 are associated with changes in occupational choice behavior,
whereas they could partly reflect changes in the returns to wage or self-employed labor.
- the 'population' effect may be defined as all the observed change in distribution that is
not explained by the two preceding effects. It corresponds to the effect of the change in
the joint distribution of all individual and household characteristics that are considered as
given in the household income generation model, that is in the individual earnings and
occupational choice equation, or in the household self-employment income function.
Obtaining more detail requires some additional modeling. For instance, a natural way of
modifying the distribution of schooling in the population is to perform a rank preserving
switch of distributions conditionally on age, gender, and possibly area or geographical
region. For instance, the highest educated women aged 25-30 in year 1 are given the
schooling level of the highest educated women aged 25-30 in year 2, with random
matching in case of equal ranks. The same is done for the next schooling level, and so on.
An analogous procedure may be used for family size, or for the matching of educational
levels across household members. For other socio-demographic characteristics, changing
the distribution can be done by reweighing the sample available in year 1 using weights
observed in year 2, conditionally on the characteristics under analysis, like age or region.
The results of the micro-simulations performed in these ways must be taken with care,
though. Indeed, they rely on the strong implicit assumption that all unobserved
determinants of household income that is unobserved determinants of individual
earnings, self-employment income and occupational choices are independent from the
socio-demographic characteristics being modified. In some cases, this assumption is quite
restrictive. For instance modifying the regional distribution of the population in the way
just described is equivalent with assuming that migrations are neutral with respect to
unobserved income determinants.
As with the price and the occupational choice effects, the analysis of population effects
with the preceding simulation rules is incomplete. To be sure, changes in the distribution
of schooling or migration flows might very well have modified the equilibrium of the
labor market and generated changes in the structure of earnings, which in turn could have
triggered changes in occupational choices. That the decomposition just described offers
no direct way for taking this kind of general equilibrium effects into account might be
held against it.
More fundamentally, it must be stressed that the micro-simulation methodology just
described is essentially descriptive. It permits to identify major changes behind
distribution data at two points of time, something that the mere inspection of the data, and
simple decomposition of some summary inequality measure might miss. Assuming that
12

This means that the results of a micro-simulation is random. In the UNDP (2001) project, several authors
do Monte-Carlo analysis and report the means and standard deviation of micro-simulation results.

7
major changes have indeed been identified, it will then be time to ask whether they may
be related to each other by some common economic phenomenon or whether they are
independent. The former step is necessary for an analysis of the true economic causes for
changes or no change in the distribution of income to be possible, though. The
examples shown in the next section suggest that this first step is generally extremely
instructive.
2. Comparative facts about development and distribution : four country stories
This section summarizes the results obtained with the preceding decomposition method
in four countries : Brazil (1976-1996, urban sector only, by Ferreira and Paes de Barros,
2000), Indonesia (1980-1996, by Alatas and Bourguignon, 2000), Mexico (1984-1994, by
Legovini, Bouillon and Lustig, 2001) and Taiwan, China (1979-1994, by Bourguignon,
Fournier and Gurgand, 2000). The discussion is essentially limited to the decomposition
of distributional changes into the price, occupation and population effects defined above.
Results are first commented on a comparative basis. Then, the 'story' suggested for each
country by the whole decomposition exercise is succinctly summarized.13 For future
reference, table 1 shows some general characteristics of the evolution of the socioeconomic structure in the four countries.
< Table 1 around here >
Table 2 reports the decomposition of the change in the Gini coefficient between the initial
and terminal years of the periods under analysis. Using this summary inequality measure
is restrictive here because the interest of the methodology being used is precisely to
permit considering the whole distribution. This makes the discussion simpler, though.
The decomposition is made into two steps. Bold entries in the table refers to the general
effects identified above : price, occupational choice and population. The latter effect has
been decomposed itself into two effects, however. The first corresponds to changes in the
distribution of unobservables in the earning and self-employment income functions, as
summarized by the usual residual term in earning and self-employment income
regressions in the household income generation model. The second is due to the change
in the distribution of individual and household characteristics used explicitly in the
respective models. Other (normal) entries in that table correspond to some further subdecomposition of the preceding effects.
The first stage decomposition (bold entries) in table 2 suggests that, in all countries,
there are numerous powerful individual forces for change in the distributions, even
though they sometimes tend to offset each other. The absolute value of the effects
identified by the decomposition methodology, in the body of the table, is indeed
frequently larger than the absolute value of the actual change in the top row. For instance,
inequality, as measured by the Gini coefficient, hardly changed in Brazil. Yet, it could
have fallen by 2.6 percentage points because of the population effect. In the opposite
direction, the reason why inequality increased so much in Mexico is precisely because the
13

For more detail, interested readers are sent back to the original studies. They may be downloaded from
www.iadb.org/sds/pov/publication.

8
occupation effect was not strong enough to compensate for the two strongly unequalizing
population and price effects.
A second noticeable feature of table 2 is that there is little uniformity across countries.
Looking at the first stage decomposition (bold entries), there is no row where effects are
uniformly positive or negative, or uniformly large or small (in absolute value). This
suggests that there is very much national specificity in the way the income distribution
behaves over time and in the forces responsible for its evolution. The population effect
would seem to be pretty big in absolute value, when considering Brazil, Indonesia and
Mexico. But it is small, almost negligible overall, in Taiwan. Likewise, the price effect is
moderate in Brazil, a little bigger and negative in Indonesia, and very strongly positive in
Mexico and Taiwan.
A third feature of table 2 is the potentially important role of unobservables. The change
in the variance of the residuals of the regressions on earnings and self-employment
income are responsible for a 2 percentage point fall in inequality in Taiwan and a 2 point
increase in Indonesia. In comparison, this effect is negligible in Brazil and Mexico. By
definition, there is some ambiguity about the interpretation to be given to this term. It
may correspond to a change in the distribution of unobserved income determinants in the
population, or to a change in their remuneration.14 But it may be given other
interpretations too. For instance they may correspond to transitory income components or
even measurement errors. This latter case is particularly interesting because it gives more
weight to the other components of the decomposition. If indeed, the change in the
residuals' variance corresponds to changes in the size of measurement errors or transitory
income components then it should simply be ignored. In such a scenario, the actual
change in permanent income inequality would be a 3.9 point increase in Taiwan and a .4
drop in Indonesia.
<Table 2 around here >
Instead of getting into the more detailed effects shown in table 2, it seems more efficient
to jump immediately to the kind of story that this decomposition suggests for the
evolution of the distribution of income in the four countries.
- Brazil
Neither mean income or GDP per capita nor inequality changed much in Brazil
between 1976 and 1996. The moderate change in the Gini coefficient corresponds in
effect to a sizable worsening of the situation of the poorest ( bottom 15 per cent). This
increase in both absolute and relative poverty was related to changes in participation
decisions and occupational choices, in combination with declines in the labor market
returns to education and experience. These changes were associated with greater
unemployment and informality, as one would expect, and it is difficult not to relate them
14

In the case of individual earnings in the US, Juhn, Murphy and Pierce (1993) interpret the observed
increase in the variance of the residuals as the sign that unobserved 'talents' are paid a higher price. But
there is no solid justification for that interpretation.

9
to the sluggish growth performance of Brazil during the two decades under analysis.
While the existence of a group excluded from both the productive labor markets and any
substantive form of safety net seems to have been identified, it was not possible to
interpret clearly the phenomena behind the change in the determinants of their
occupational choices, and in particular the role of demand. Issues of mobility require
further understanding in this context. For it is possible that the preceding changes reflect
transition strategies rather than changes in permanent incomes.
Even above the 15th percentile, where urban Brazilians have essentially stayed put, this
was the result of some hard climbing along a slippery slope. They had to gain an average
of two extra years of schooling (which still leaves them undereducated for the countrys
per capita income level), and substantially reduce fertility, in order to counteract falling
absolute and relative returns in both the formal labour market and in self-employment. As
shown at the bottom of table 2, both phenomena would have produced a clear
improvement in equity in the absence of adverse conditions in the labor market,
themselves most likely the outcome of poor growth performances.
- Indonesia
With an annual rate of income per capita above 5 per cent, growth performances in
Indonesia during the period under analysis (1980-1996) were impressive. Yet, overall
inequality did not change much. The small increase in the Gini coefficient is seen to be
the result of various phenomena that pushed the distribution of income in various
directions and finally produced several switches in the relative position of specific groups
of households without any dramatic change in the overall distribution. This conclusion
holds when considering changes in the structure of prices and earnings as well as when
taking into account other effects.
The most noticeable phenomena behind the changes in the structure of prices and
earnings are the following : increase in the return to schooling in rural areas except in
farming - and fall in urban areas, equalization of earnings and income across Indonesian
islands, and in particular falling gap against Java, improvement in the terms of trade of
farmers and increase in the returns to land for small holdings. Taken together, these
various phenomena, which are all clearly related to both the rate of growth and the
structural changes it caused, contributed to a small equalizing of the overall distribution
but numerous switches in the relative ranking of households within the distribution. In
other words, the stability of the overall distribution may have hidden some mobility along
the income scale, at least on the account of the price effect.
Another important phenomenon was the vigorous rural-urban migration movement, itself
the result of booming non-agricultural activities throughout the period, particularly in
Jakarta. This may only be inferred from the data because the migration status of people is
imperfectly observed in the Indonesian household survey. But this phenomenon is most
likely behind both the strongly unequalizing effect of occupational choices in table 2 and
the strongly equalizing population effect. Both are linked t each other and reflect above
all the selectivity of migration, which affected primarily rural wage workers, or more

10
generally people in rural areas with little other employment opportunities than wage
work.15 As not all migrants could find a job as a wage worker in cities, they contributed
to increasing the proportion of urban self-employed. Overall, this process produced an
increase in urban inequality, whereas income became more equally distributed on the
rural side. For the whole population, however, the effect of the migration process, fueled
by exceptional growth performances outside the rural sector, was probably limited.
Even though it has likely been a dominant factor, not all the occupational and population
effects can be explained by migration. Table 2 shows in particular that the change in
schooling levels has contributed to an increase in inequality. Given the logic of the
decomposition method used in this project, this means that other population or
occupational effects possibly migration - must have compensated for that increase.
Overall, it turns out that, in net terms, the factor responsible for the slight increase in
inequality is the increase in the variance of 'unobservables', that is the residuals of the
earning equations and self-employment functions. To the extent that this terms may
actually correspond to measurement errors or possibly a larger volatility of incomes, it
cannot be discarded that Indonesian remarkable growth between 1980 and 1996 took
place without any noticeable change in the distribution of household income, but
nevertheless with some reshuffling of relative positions. But it cannot be discarded either
that this increase in inequality reflects a higher remuneration of unobserved talents which
would itself be the result of growth.
- Mexico
Dominant factors in explaining the very substantial increase in income inequality
between 1984 and 1994 have to do with changes in the structure of earnings by
educational levels and by area of residence. The average rate of return to the number of
years of schooling did not change much during the period under analysis, but the whole
return schedule became more convex. Marginal returns increased for highest educational
levels and decreased for low levels. Economic phenomena behind that evolution may
have to do with skill-biased technological progress or the transition towards a more open
economy. In any case, such an evolution contributed to a substantial increase in the
inequality of both individual earnings and household incomes. It was complemented by a
change in agricultural terms of trade which contributed to widening the income gap
between the urban and the rural sector. Altogether these changes in the structure of
earnings and self-employment income were responsible for an increase of the Gini
coefficient equal to 3.6 percentage points in the case of individual earnings and 2.2 for
equivalized household income.
Part of the increased disparity in labor incomes among households was offset by a change
in the participation behavior of women, which itself may be related to the observed
15

Because determinants of non-wage work in rural areas, especially the availability of non-land assets that
may be used in non-farm self-employment, are imperfectly observed, this selectivity was interpreted as an
'occupational choice' effect in the decomposition methodology, that was partly compensated by a
'population' effect.

11
change in the structure of earnings. Two phenomena were revealed by the decomposition
methodology. On the one hand, lower earnings of household heads at the bottom of the
distribution may have caused a compensating increase in women participation, an
evolution that was possibly reinforced by a strengthening of the income effect in female
participation behavior. On the other hand, higher earnings at higher educational levels
may have contributed to increasing the participation of women in the corresponding
income range. The former effect proved to be stronger than the latter. If the preceding
analysis relating the two phenomena is right, behavioral responses to unequalizing
changes in the structure of earnings have thus partly mitigated the effect of the latter upon
distribution.
Education played an unequalizing role too. Somewhat paradoxically, the general increase
in the level of schooling observed in the working age population may have contributed to
more, rather than less inequality. The explanation for this result is to be found in the
convexity of the returns to schooling. Larger marginal returns at the top than at the
bottom of the schooling range implies that a uniform increase in schooling would benefit
more the rich than the poor households. This effect might have had a contribution as high
a one percentage point increase in the Gini coefficient.
The last explanatory factor responsible for the increase in inequality is linked with nonlabor incomes which became much more unequal in 1994 and at the same time more
strongly correlated with household labor income. If this income component could be
thought to give an accurate representation of capital income, it would be tempting to
conclude that higher and more unequal capital incomes contributed to the deterioration of
the distribution of household income during the period under analysis. Unfortunately, it is
well known that capital income is generally grossly under-estimated in household
surveys, and it is quite possible that the evolution observed between 1984 and 1994
simply corresponds to a change in the coverage of that particular income source by the
household income survey. For the time being, the status of that component in the
decomposition analysis for Mexico is comparable to that of the variance of residuals in
other countries. In other words, it might well be purely spurious, in which case the
observed increase in Mexican inequality might be overestimated.
- Taiwan
As in Mexico, the leading factor in explaining the evolution of the distribution of income
in Taiwan between 1980 and 1994 is the increase observed in the rate of return to
schooling among both wage earners and self-employed. This increase amounted to 2
percentage points for men and almost 4 for women and may have been responsible for an
increase in the Gini coefficient of the distribution of household income equal to 2
percentage points and obviously more for the distribution of individual earnings. One
possible explanation for that rise in the price of educated labor may be the dramatically
high rate of growth of Taiwan's economy throughout the period (6 per cent). However, it
must also be noticed (table 1) that the supply of educated labor seems to have increased
approximately in the same proportion as labor demand at least under the assumption of
no change in the skill structure of the latter. Both increased by 60 to 70 per cent. A

12
competitive explanation of the increase in the rate of return to schooling and to increasing
inequality in Taiwan would thus have to be sought in the evolution of the structure of the
economy, that was heavily biased towards skilled labor away from light manufacturing
to heavier manufacturing, services to firms, and financial services as well as possibly in
skill-biased technological change.
The increase in women participation was less pronounced than in other countries, but
participation behavior became more concentrated on wage work, and schooling became a
stronger determinant of participation perhaps as a reflection of higher returns to
educated labor. Also women work became more autonomous with respect to household
heads' income. All this may explain why women wage work became more frequent in
well to do households and contributed to an increase in inequality.16
Altogether, it would thus seem that the exceptional growth performances of Taiwan
would have contributed to increasing quite substantially the inequality of the distribution
of household income, if it had not been for a drop in the variance of the residuals of
earning equations. It is also to be noted that the substantial changes in the sociodemographic structure of the population did not do very much to counteract that
evolution. Mildly equalizing effects of the general increase in schooling and the drop in
fertility were offset by other changes in the distribution of socio-economic characteristics
which remain unidentified.
3. Aggregate relationships between growth and distribution in the light of the four
country stories
The four preceding stories are based on a thorough micro-economic analysis of the
evolution of the distribution of income in selected countries. The question addressed in
this section is whether they fit well the framework that is generally used to study the
relationship between growth and inequality at the macro-economic level. In other words,
is it possible to go more or less directly from a decomposition analysis of the type shown
above to the specification used in regression analysis at the macro-level, most often run
on cross-country data? If it is the case, then what does explain that the results obtained in
cross country regressions with distribution on the left hand side are so disappointing? In
the opposite case, is there a way to improve the initial specification, or is the crosscountry aggregate approach essentially flawed?
The stories above are about the consequences of growth in a broad sense - for the
distribution of income. In the growth-inequality literature, the part that is relevant is
therefore the one that relates directly or indirectly to the Kuznets curve, that is where the
distribution, or changes in it are explained by the level of income and a host of other
variables. It has now be proven that the Kuznets curve which had been so popular in the
1970s was probably the result of particular features in the data of that period. It
essentially vanishes when more recent cross-sections or panel data are used. As a matter
16

Paradoxically, the same phenomenon contributed to a drop in individual earnings inequality because
women entering wage work were situated in a (upper) middle position among men and women wage
earners.

13
of fact, recent attempts at explaining variations of inequality across countries using better
data and controlling for fixed effects have identified only a limited set of statistically
significant variables, not necessarily related to economic development or economic
growth. Thus, land inequality, schooling level or schooling inequality, and economic
dualism are among the very few variables the significance of which proved to be robust.
In most cases, however, significance is achieved by mixing regressions in levels across
countries and time variations within countries. Unfortunately, few significant results are
preserved or may even be identified when the analysis is restricted to the latter. 17
Recent attempts at explaining changes in the distribution by the same variables as those
used in explaining differences in growth rates across countries have been disappointing
too see in particular Lundberg and Squire (1998) and Dollar and Kraay (2000). The
latter go as far as concluding that 'growth is good for the poor' because the growth rate
itself or its major policy determinants are apparently without significant effect on the
distribution. As mentioned in the introduction, this conclusion may be much too quick,
though. There are many reasons why variables on the right-hand side in a regression may
turn out being unsignificant. Measurement error is a first possibility and may be difficult
to correct for because of too few instruments being available. The specification being
chosen may also be inappropriate. In particular, too many other crucial variables may be
absent from the regression because they are not available on a regular basis. The country
stories in the preceding section certainly suggest that all these sources of bias of crosssectional analysis are very real, and may actually contribute to hiding what is being
looked for.
Growth is without any doubt part of the four stories told above and it could hardly be
held that the evolution of the distribution in these four countries was independent from
growth. It is far from being the only determinant factor, though. It may also have
contradictory distributional effects. Finally, the way it affects distribution may depend on
several other characteristics of the country, and possibly on the policies being followed.
The next paragraphs illustrate those points.
It makes little doubt that stagnation in Brazil is responsible for more inequality because
the economy did not provide enough employment opportunities at the bottom of the
distribution. At the same time, stagnation may have been responsible for more equality
because it possibly contributed to a drop in the rate of return to schooling. At the opposite
end of the scale, growth has also been responsible for more inequality in Taiwan because
it was extremely fast and may have put pressure on the market for skilled labor. By
pushing up the rate of return to schooling and creating employment opportunities in
priority for educated women, it was seen above that this process led to a more unequal
distribution. Likewise, in Indonesia, growth is undoubtedly responsible for changes in
inter-regional earning differentials, an improvement in the terms of trade of farmers, and
rural-urban migrations, with neutral effects on the distribution but substantial reshuffling
of relative income positions. In practically all countries, growth was then found to be
responsible for significant changes in the distribution, or at least potentially so.
17

On all this see the survey by Kanbur (2000). See also Deininger and Squire (1996), and Li, Squire and
Zou (1998).

14

This does not imply that the relationship between growth and distribution is a simple one.
An important point that comes out of the comparative analysis above is that the various
changes that have been identified resulted in several cases from the interaction between
growth and some other policy variable or some specificity of the economy. Also, in
several cases, those changes may have tended to cancel each other in terms of overall
inequality. As an illustration of the former remark, it may be noticed that what seems to
matter for the effect of growth on the structure of earnings is the underlying evolution of
the supply of skilled labor. If supply, as determined by both the average level of
schooling of the population at working age and occupational choices of the more
educated, lags behind growth, then the rate of return to skill is bound to increase with
unequalizing effects. This may have been the trend in Taiwan, the opposite being true in
Brazil. Thus, it is not so much growth that matters as the gap between the demand and
supply of skilled labor. Note also that demand is affected not only by the rate of growth
but also by its structure, which may itself result from policy. For instance, the reason why
demand for skilled labor grew so much in Taiwan may have to do with the openness of
the economy and the strong changes it caused in the structure of production toward
sectors more intensive in both physical and human capital. The same may be true in
Mexico if the increase in the rate of return to schooling is indeed to be related to the
opening that took place since the mid-1980s in that country.
One would probably be embarrassed if being asked to translate the growth-related part of
the stories told above into a simple linear relationship between inequality, growth and
other variables. From what precedes, it would seem impossible not to have among
explanatory variables the growth rate of GDP per capita, some indicator of exogenous
changes in participation, preferably differentiated by skill level, the evolution of mean
schooling, and policy variables like openness or change in openness. Without all these
variables, it would not be possible to describe the contrasted experiences of countries like
Brazil, Taiwan or Mexico during period extending 10 years and over. Practically,
however, cross-country linear regressions rely on much cruder variables, simpler
specifications and shorter spells. Some variables in the preceding argument are often
missing typically, exogenous changes in participation are ignored whereas others are
ill specified. For example, Dollar and Kraay (2000) use school enrollment as an
independent regressor whereas it would probably be better to use the potential increase in
the skilled labor force, which might be summarized, as a first approximation, by a
combination of the mean schooling and some participation index.18 There is also the
issue of the time period over which growth and distributional change are observed. The
argument in the preceding section refers to the medium or even the long-run, whereas
data samples found in the cross-country literature often include much shorter spells,
which are likely to be contaminated by short-run phenomena.
Another lesson to be drawn from the country stories above for aggregate cross-country
analysis is the importance of several socio-demographic variables only loosely related to
current economic growth and policy. Two such variables appearing in table 2 are the
18

This distinction may look very much like the controversy on education and growth, see for instance
Pritchett (2001). The argument may be stronger

15
distribution of schooling within the population at working age different from mean
schooling, which is supposed to influence distribution only indirectly through the rate of
return to schooling - and fertility, or more exactly the distribution of family size within
the population. There probably are others, for instance the changing matching of
individual characteristics within households. Doubtlessly, these variables are related to
policy and possibly to growth but this relationship is of a very long-run nature, the result
of decisions and economic events which took place a long time ago. Yet, they are still
important to explain the evolution of the distribution. Failure to take them into account in
the case of Brazil would lead one to conclude that zero economic growth had no effect on
the distribution or would lead one to greatly overestimate the role of current policy in
Mexico.
Taking the effects of these long-run socio-demographic trends properly into account is
not an easy thing. The example of education is quite illustrative of that difficulty. As can
be seen in table 1, schooling made important progresses in the population at working age
in practically all the four countries, although less rapidly in Brazil and Mexico. Yet, it
may be seen in table 2 that the effect of schooling expansion on the distribution of
income is very different from a country to the next. For instance, schooling expansion
increased inequality in Mexico, as seen above, and also in Indonesia but reduced it in
Taiwan and Brazil. The reason for this difference is mostly that earning profiles with
respect to education are less convex in Taiwan and Brazil than in Mexico and the
expansion of education in the latter countries may have been stronger, in absolute value,
at the bottom than at the top of the schooling range. Under these conditions, the sign of
the effect of a variable like schooling expansion on inequality is likely to be highly
country specific. Not controlling for that specificity in a cross-country regression would
likely lead to the conclusion that schooling expansion has little impact or no impact on
the evolution of the distribution, and therefore that educational policies have no
significant influence on distribution in the long-run. The four country stories suggest that
this would indeed be wrong.
In sum, in-depth micro-economic analysis of distributional changes in the four countries
considered in this paper reveal serious weaknesses in the macro-econometric crosscountry analysis of the effect of growth and policy on distribution. On the one hand, it is
not clear that the specification being used in those regressions is adequate in view of the
mechanisms revealed by micro-economic analysis. The relationship between growth,
development policy and distribution is more complex and country specific- than a
standard regression model would allow for. On the other hand, some variables are
omitted despite the importance they seem to have in micro analysis. Of course, this would
not be a problem if they could be considered as independent from the actual regressors,
but this is hardly the case. For instance, change in mean schooling clearly has
implications for the change in the distribution of schooling in the population. Under these
conditions, concluding from international aggregate data comparisons that there is no
significant effect of growth or growth policy on distribution may be misleading. This may
be the result of the specification and the variables being used. The problem is that
alternative specifications allowing for the proper interactions that would permit
representing country specificity might be difficult to implement because of limited

16
degrees of freedom and often because the required information is not available in a large
enough sample of countries e.g. where will one find cross-country data on the
convexity of the schooling/earning profile? All this invites to considerable care in
interpreting the results of this type of aggregate analysis.
4. From descriptive to modeling micro-analysis of distributional changes
As mentioned several times, the country stories brought forward by the decomposition
methodology explained above are essentially partial in the sense that they do not take into
account general equilibrium links between the various elements of the decomposition.
The way growth and policy parameters was introduced in these stories was thus mostly
intuitive. It indeed seemed 'natural' to relate changes in employment behavior, or the
employability of Brazilian households at the bottom of the distribution to the overall
stagnation of the economy during the period under analysis. Likewise, it was tempting to
relate the increase in the rate of return to schooling and its unequalizing effect to the fast
growth of the economy in Taiwan and to openness in Mexico. But, these are hypotheses
that should be confirmed either by some kind of direct evidence or by some
counterfactual device. Without such a confirmation, the tentative critique made to the
aggregate approach to the distributional consequences of economic growth would not be
fully justified. Macro-analysis may be inconclusive because of inadequate specification,
itself the consequence of a lack of both appropriate data and degrees of freedom. But the
decomposition methodology behind the stories told above might not be more conclusive
because of the lack of explicit link among the elements of that decomposition and
between those elements on the one hand, and growth as well as policies affecting both
growth and distribution on the other.
The solution to that problem would consist of going one step further in the decomposition
methodology and to relate explicitly some of the causes that have been identified for
distributional changes to macro-economic shocks, policies or the process of growth in
general. Such a step has been taken in some recent work undertaken under the auspices of
UNDP Ganuza et al. (2001) - and of the World Bank Robillard, Bourguignon and
Robinson (2001). Both stand closer to counterfactual modeling than to the gathering of
direct evidence. But these attempts are interesting because they show promising
directions for future micro-based research on growth, policy and inequality. The next
paragraphs describe informally the features of these two sets of studies.
Going back to the decomposition methodology, assume that one is given aggregate
information on the way growth has proceeded during a given time interval possibly as a
result of some given policy. As a bridge with the decomposition methodology, imagine
that this information concerns the rate of growth of labor incomes, that of capital
incomes, the evolution of the skill gap, possibly that of the agricultural terms of trade,
and finally employment levels by types of employment say formal/informal or wage vs.
self-employment and gender. Such information could come from any type of macroeconomic model, with a minimum level of disaggregation in terms of sector and factors
of production. Applied general equilibrium models would certainly be very helpful at this
respect. But macro-econometric models could be used too, and could in effect provide

17
more solid evidence altogether. In any case, with such macro counterfactuals at hand, it is
conceptually not too difficult to generate changes in the coefficients of the household
income generation model in the decomposition methodology above that will fit the macro
counterfactual, rather than the actual evolution of the economy. Based on this new set of
coefficients, it is then possible to gauge more directly the effects of some aspects of
growth or of a specific policy on distribution.19
This mapping of a small number of macro aggregates into the distribution of income
through the household income generation model developed for the decomposition
methodology is best seen as an extension of standard 'grossing-up' methods on household
survey data. First, starting from the original distribution, the various household income
sources are rescaled in a proportion that varies across income sources and possibly labormarket segments, so as to fit the overall rates of growth provided by the macro
counterfactual for each type of income. Because households may derive income from
many different sources, however, this operation is much more complex and has more
subtle effects on the overall distribution than simply multiplying the total income of
households belonging to different groups defined for instance by household heads'
occupation - of the head by different proportionality factors, as is often done.
Second, it is necessary to modify employment levels in the same labor-market segments
as for income rescaling so as to be in conformity with the macro counterfactual. This is
done by reweighing households in the original survey conditionally on the occupation of
their members, and practically by modifying the coefficients of the occupational choice
models in the decomposition methodology. But this procedure that makes occupational
choices consistent with the counterfactual's aggregate employment predictions is
fundamentally different from reweighing households on the basis of a simple criterion
like the occupation of the household head, his/her education or area of residence. There
are two reasons for this. First, reweighing takes place on individuals rather than
households so that the composition of households and the occupation of their members
are really what matters. Second, the reweighing depends on a complex set of individual
characteristics and may be highly selective. For instance, if the macro counterfactual
points to many individuals moving from self-employment and inactivity to wage work,
individuals whose occupational status will change at the micro-simulation stage are not
drawn randomly from the initial population of individuals in the formal sector. On the
contrary, they are drawn in a very selective way, essentially based on cross-sectional
estimates of the probability they had to be a formal wage worker or a self-employed in
the first place. For instance, those with the lowest earnings or the youngest will actually
move. This has a direct effect on the distribution of income or earnings within
conventional groups of individuals or households, and introduce a new dimension to the
original macro counterfactual.
This line of modeling was followed in a UNDP multi-country project trying to estimate
the impact of the opening of Latin American economies since the 1980s on the
distribution of individual income among active people. Macro counterfactuals were
19

For a formal exposition of this bridge between macro analysis and micro-simulation see Robillard,
Bourguignon and Robinson (2001).

18
generally based on AGE models with varying degrees of integration. Results of these
various studies are presently being synthesized see Ganuza et al. (2001). Another
example of this approach to the distributional evaluation of macro policy or macro
phenomena is the analysis of the distributional effects of the Indonesian crisis by
Robillard, Bourguignon and Robinson (2001). Again, the underlying macro
counterfactual comes from a real AGE model coupled with a few nominal macro
relationships. The mapping into distribution is a little more complex than in the preceding
case because a larger number of labor market-segments and income sources are
considered and the analysis focuses on households rather than individuals.
These are only first attempts in a direction that looks quite promising. Future work should
try to strengthen and broaden the methodology developed so far. It should also move
closer to direct econometric evidence in the elaboration of macro counterfactuals. For
instance, one may feel more secure relying on regression estimates of the elasticity of the
skill wage gap with respect to labor demand, or of the output elasticity of employment
than imposing some kind of equilibrium conditions within a AGE framework. Finally, it
also seems necessary to introduce some kind of dynamics in the representation of
individual behavior. Income smoothing in situations of crises or long-run migration
behavior are likely to be very income selective and may be an important reason why
growth or economic fluctuations are not distribution neutral.

Conclusion
Very much emphasis has been put in all the literature about the distributional
consequences of growth on the results of cross-country regressions run on a few
aggregate variables. Ideally, such an emphasis seems fully justified. If some theoretical
model is available and can be tested at the country level, the same can certainly be done
on a cross-sectional basis. It may even be more efficient to do so because more data are
available, especially when working with cross-sections of time series, and also because of
the diversity of national experiences. Country specificity seems to require more detailed
data than the aggregate variables generally available on a cross-country basis as well as
particular specifications, however. The big problem is then that degrees of freedom are
likely to be insufficient to do serious estimation and serious testing. This is especially
problematic when focusing on the long-run consequences of growth because one cannot
rely on multiple growth spells for each country in the sample.
Summarizing the results obtained in several recent country studies, the present paper has
shown that very much insight about the distributional consequences of growth could be
obtained from the comparative analysis of micro household data over time. Beyond
observing changes in the distribution, a simple decomposition methodology based on
micro-simulation facilitates the identification of the sources of changes in the distribution
of income, and with some stretch of imagination permits to build economic stories that
could explain these changes or the way in which various forces for change may in some
cases have offset each other. The stories summarized in this paper permitted to identify
various ways by which growth and policy significantly affected the evolution of the

19
distribution in single countries. This is in contrast with what may be gathered from the
recent literature based on cross-country aggregate analysis, which suggests that growth
and distribution policies are, on average across growth spells, distribution neutral. The
reason for that apparent discrepancy seems to lie mostly in a high country specificity of
the relationship between growth and distribution, which can hardly be taken into account
properly in cross-country aggregate analysis.
The main message of this paper thus is that micro analysis of distributional changes is the
direction which must now be given priority. An obvious distinctive feature of the 21st
century will be the increasing availability of detailed micro data on individuals and
households, as well as rapidly growing treatment capacity. It thus seems natural to
invest in the type of methodology summarized in this paper. This may be made in several
directions. a) Multiplying country studies based on statistical decomposition techniques
that may reveal the sources of change in the distribution. b) Improving on these
techniques by linking them with counterfactual modeling either though calibrated models
like AGE or through macro-econometric models. c) Expanding the modeling of microeconomic behavior, in particular by getting into dynamics and maybe making the models
more structural. Following these various research directions should be useful from a
double perspective. On the one hand, they will enrich micro-based stories and will permit
to accumulate stylized facts on the effects of growth and policy on distribution,
something that is crucially missing for the moment. On the other hand, this line of
research will progressively make available the detailed data necessary for good macro
analysis across countries and more rigorous hypothesis testing.

20
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Table 1. Selected indicators of long-run structural evolution

Country

Brazil

Indonesia

Mexico

Taiwan

1976-1996

1980- 1996

1984-1994

1979-1994

4499

1430

5758

3786

Annual growth rate of GDP pc (1980-1996, %)

Growth rate of mean household per capita incomeb (%)

1
0.2

5.7
5.1

2.4
1.1

6
5.7

Average years of schooling : initial year

: terminal year

3.2
5.3

3.8
6

5.6
6.9

6
9.5

Urbanization rate (%) : initial year

: terminal year

68
77

23
35

Women participation (%) : initial year

: terminal year

28
42

Family size : initial year

: terminal year

4.6
3.6

Period being analyzed

GDP pc in 1980 (ppp US $)

Gini coefficient (household income per capita, size weighted

households) : initial year
nal year
a
b

Urban sector only

As given by household surveys in initial and terminal years

0.595a
0.591

70
84
33
41

46
50

5
4.4

5.3
4.9

4.9
4.2

0.384
0.402

0.491
0.549

0.271
0.29

23

Table 2. Decomposition of the evolution of the inequality of household income per capita
(Absolute change in Gini coefficient, percentage points)
Brazil
(urban)
1976-1996

Indonesia

Mexico

Taiwan

1980- 1996 1984-1994 1979-1994

Observed change

-0.4

1.6

5.8

1.9

Overall Price Effect

- Education
-Wage gapsa

0.3
-0.2
0.6

-0.9
0.1
0.3

1.9
1.1
1.1

2.4
(2.1) b

Overall Occupation Effect

Distribution of residuals in earning and selfemployment income functions
Overall Population Effect
- Education Effect
-Number of children

1.5

4.7

-0.5

1.3

0.1

-2

-2.6
-0.3
-2

-4.3
1.3

4.6
1

0.2
-0.2
-0.8

Source : MIDD project, various studies

a
b

Between gender, urban/rural, wage/self-employed , depending on the country

Indirectly inferred from various pieces of information in the Taiwan study, as this figure is not directly available there.